Definition and Background of the MFN Clause

IISD.org 2 IISD Best Practices Series: The Most-Favoured-Nation Clause in Investment Treaties

2.0 Definition and Background of the MFN Clause

It is impossible to analyze criticisms of current interpretations of MFN by certain investment tribunals without going into its characteristics. Including MFN in treaties is a very old practice by states. Nowadays considered the “cornerstone” of the World Trade Organization WTO, unconditional MFN 2 constitutes a powerful lever for the multilateralization of the commitments of WTO member states. It should be noted that MFN works in an integrated multilateral framework in the WTO in which member states are, in principle, subject to the same rules. Moreover, MFN is the object of numerous derogations in the WTO, including to the beneit of developing countries as part of special and diferential treatment. Moreover, under the General Agreement on Trade in Services GATS, each member state shall grant MFN treatment for every measure afecting trade in services, unless that measure is listed in Annex on Article II Exemptions. MFN is one component of the principle of non-discrimination under international law. Indeed, non- discrimination can be appreciated in its internal aspect through the treatment accorded to nationals compared with that accorded to foreigners in national territory national treatment. It can also be appreciated in its external aspect through the treatment accorded by the host state to foreigners of other nationalities MFN treatment. Schematically, 3 under MFN a signatory state must extend to another party that is a beneiciary of the clause the most-favourable treatment that it would have granted to a third party. Under a BIT, this amounts to the host state extending to investors or investments from the other signatory state the most-favourable treatment that it would have granted to investors or investments from a third state to the BIT. The treaty in which an MFN clause is included is called the “basic treaty.” Three main characteristics of MFN merit attention. First, the obligation to grant MFN treatment is strictly a treaty obligation, and it does not arise from customary international law. For this reason, a state is only obliged to grant MFN treatment if it has made commitments in a treaty and only to the extent of the commitments made therein. As clearly stated in the draft articles on MFN of the International Law Commission ILC in its article 7, the beneit of MFN treatment may only by claimed from a state “otherwise than on the basis of an international obligation undertaken by the latter State.” 4 The commentary states that: Although the grant of most-favoured-nation treatment is frequent in commercial treaties, there is no evidence that it has developed into a rule of customary international law. Second, the MFN clause is a relative obligation. Unlike other BIT obligations, it is not possible to have an advance and absolute deinition of the content of the “no less favourable” treatment to be granted by the host state. Everything will depend on what is granted to investors of other nationalities and their investments in the host state. In this, we can say that the host state may only grant to others what it was initially willing to give to some. Third, one can only compare what arises from the same sphere of relationship. In accordance with article 10.2 of the ILC draft articles on MFN clauses, this clause can only come into efect if the persons or things beneiting under MFN: a belong to the same category of persons or things as those in a determined relationship with a third 2 MFN is said to be unconditional in the WTO because there is no obligation of reciprocity. In practice, when an advantage is granted by one member state, it has to be automatically and unconditionally extended to similar products of other WTO member states. 3 MFN treatment is defined in article 4.a of the Draft Articles on MFN Clauses of the International Law Commission ILC as “treatment accorded by the granting State to the beneficiary State, or to persons or things in a determined relationship with that State, not less favourable than treatment extended by the granting State to a third State or to persons or things in the same relationship with that third State.” See Draft Articles on MFN clauses with commentaries, adopted by the ILC at its third session in 1978, ACN.4SER.A1978Add.1 Part 2, p. 18. Retrieved from http:legal.un.orgilctextsinstrumentsenglishcommentaries1_3_1978.pdf. The text was reproduced in the Yearbook of the International Law Commission , 1978, Vol. II, Part Two. 4 Id., p. 25. IISD.org 3 IISD Best Practices Series: The Most-Favoured-Nation Clause in Investment Treaties State which beneit from the treatment extended to them by the granting State and b have the same relationship with the beneiciary State as the persons and things referred to in subparagraph a have with that third State. The arbitration commission in the famous Ambatielos case had ruled back in 1953 that MFN “can only attract matters belonging to the same category of subject as that to which the clause relates.” 5 5 ICJ, Ambatielos, Merits Greece v. The United Kingdom, judgement of May 19, 1953, ICJ Report, 1953, p. 10. IISD.org 4 IISD Best Practices Series: The Most-Favoured-Nation Clause in Investment Treaties

3.0 MFN in Investment Treaties